No (Tax-) Free Lunch: Entertainment, Awards, and Meals Under the Tax Cuts and Jobs Act No (Tax-) Free Lunch: Entertainment, Awards, and Meals Under the Tax Cuts and Jobs Act

No (Tax-) Free Lunch: Entertainment, Awards, and Meals Under the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act ("Act"), signed into law on Dec. 22, 2017, changes, among many other things, the availability of employer deductions for fringe benefits. In this article, we take a close look at the Act's changes to employer deductions for business-related entertainment, employee achievement awards, and on-premises meals.
 
This article is the second in a series by Ice Miller discussing how the Act affects employee benefits and compensation.
 
Entertainment Activities
 
Section 274 of the Internal Revenue Code ("Code") has long prohibited employer deductions for costs related to entertainment, amusement, or recreation activities. However, there was an exception to this general prohibition for activities either (i) directly related to the employer's business or (ii) associated with the employer's business and occurring right before or after a substantial and bona fide business discussion (e.g., at a convention). While the Code allowed a deduction when the entertainment was related to the employer’s business, the deduction was generally limited to 50% of the expenses incurred.

The Act wholly eliminates this deduction. Going forward, an employer will no longer be able to deduct the costs of an entertainment, amusement, or recreation activity, regardless of the activity's relationship to the employer's business. These changes apply to amounts paid or incurred after Dec. 31, 2017.

Comment: The Act did not change the exceptions to the general disallowance of deductions for expenses for entertainment, amusement, or recreation found under Code Section 274(e). These include, for example, food and beverages for employees on the employer's business premises, expenses that are imputed as income to employees, and employee and director business meetings.
 
Comment: Prior to the Act, only 50% of meal and entertainment expenses were allowed as a deduction. The Act eliminates this restriction as it applies to entertainment expenses, since they are generally 100% disallowed under the Act. As a result, however, any entertainment expenses that are still permitted due to pre-existing exceptions not changed by the Act—such as employee business meals—are now 100% deductible.
 
Employee Achievement Awards
 
Section 274(j) of the Code permits a limited employer deduction for the cost of an employee achievement award. An employee achievement award is an item of tangible personal property an employer gives to an employee at a meaningful presentation for an achievement related to length of service or safety. The value of the employee achievement award is also excludible from the recipient employee's gross income to the extent its cost is deductible by the employer.
 
The Act clarifies the definition of "tangible personal property" under Section 274(j). The Act states that tangible personal property does not include
 
  • cash, cash equivalents, or gift cards, or
  • vacations, meals, lodging, theater tickets, sports tickets, stocks, bonds, or similar items.
Therefore, none of these items may be given as a deductible and excludible employee achievement award. The provision applies to amounts paid or incurred after Dec. 31, 2017.

Comment: This clarification is a codification of the IRS' existing interpretation of the definition of tangible personal property and, therefore, should not result in a change in application or enforcement by the IRS.

Comment: This clarification makes clear that benefits such as theater tickets, sports tickets, etc. are generally non-deductible gifts, unless they qualify as de minimis fringe benefits.

Meals Provided for Employer's Convenience

Section 119 of the Code excludes from an employee's income the value of any meals provided to him (or his spouse or dependents) by the employer if provided on the employer's business premises and for the employer's convenience. Section 132 of the Code excludes from income the value of a de minimis fringe benefit, which generally includes the value of a nondiscriminatory eating facility operated by the employer on or near its business premises. Prior to the Act, Section 274 of the Code permitted employers to deduct 100% of the expenses associated with providing de minimis fringe benefits through an eating facility and 50% of the expenses otherwise associated with providing food or beverages.

The Act limits the employer deduction for the cost of an eating facility to 50% for calendar years 2017 through 2025, and then completely eliminates this deduction for years after 2025. The Act does not change the existing limit of 50% with respect to meals provided for the employer's convenience on employer premises for calendar years 2017 through 2025 but similarly completely eliminates this deduction for years after 2025. Although employees will still be able to exclude the value of the on-premises meals and eating facilities from their income, beginning with the 2026 tax year, employers will not be able to deduct the expenses of providing these benefits.

Comment: These changes do not affect the deductions for meal expenses paid or incurred while traveling for business, discussed above. Rather, they apply exclusively to meals furnished on the employer's business premises for the employer's convenience. The U.S. Tax Court recently concluded that a hotel was a hockey team's "business premises" and allowed a 100% deduction for meal expenses. Given the deduction for meals provided on business premises will end for years after 2025, employers may prefer a more conservative interpretation of the term business premises in the future.

For more information, contact Matt Ehinger, Audra Ferguson-Allen, Rob Gauss, Tom SchnellenbergerMarc Sciscoe, Tara Sciscoe, Chris Sears, Matt Servies, or the Ice Miller Employee Benefits or Tax Practice attorney with whom you work.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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